CHIANG KAI SHEK COLLEGE

SY 2012-2013 1st Semester MANAGEMENT ACCOUNTING PART 2

NAME SCORE $300,000 per year.
What would the annual cost of additional supervision have to be in order for Hadley to be
COURSE economically indifferent between making or buying the component? (Assume all other
conditions stay the same.) (E*)
A. $17,000. C. $19,000.
B. $18,000. D. $20,000. G & N 9e
MULTIPLE CHOICE: Choose the best answer.
4. The manufacturing capacity of Jordan Company's facilities is 30,000 units a year. A summary
1. Lowden Production Company has 200 labor hours available. There is no limit on machine of operating results for last year follows:
hours. Lowden can sell all of B they want, but can only sell 30 units and 20 units of A and C, Sales (18,000 units @ $100) .... $1,800,000
respectively. Variable costs ................. 990,000
Product A Product B Product C Contribution margin ........... 810,000
Contribution margin per unit $20.00 $10.00 $16.00 Fixed costs .................... 495,000
Labor hours per unit 4 5 4 Net operating income ........... $ 315,000
Machine hours per unit 10 8 2 A foreign distributor has offered to buy 15,000 units at $90 per unit next year. Jordan expects
Given the limited supply of labor hours, which product(s) and how many should the company its regular sales next year to be 18,000 units. If Jordan accepts this offer and rejects some
produce? (E) business from regular customers so as not to exceed capacity, what would be the total net
operating income next year? (Assume that the total fixed costs would be the same no matter
H&M A. B. C. D. E.
how many units are produced and sold.) (M1)
Product A - - 30 units 30 units 30 units A. $390,000. C. $840,000.
Product B 24 units 40 units - - 16 units B. $705,000. D. $855,000. AICPA adapted
Product C 20 units - - 20 units -
5. One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y.
2. P Co. has only 25,000 hours of machine time each month to manufacture its two products. Joint costs are $135. X is sold for $2.50 per pound and Y can be sold for $3.00 per pound or
Product X has a contribution margin of $50, and Product Y has a contribution margin of $64. processed further into 30 pounds of Z (10 pounds are lost in the second process) at an
Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. additional cost of $60. Each pound of Z can then be sold for $6. What is the effect on profits
If P wants to dedicate 80 per cent of its machine time to the product that will provide the most of processing product Y further into product Z? (M1)
income, P will have a total contribution margin of (E*) A. No change. C. $60 decrease.
A. $200,000. C. $240,000. B. $30 increase. D. $60 increase. Wiley 2011
B. $210,000. D. $250,000. Barfields
The next three questions are based on the following information. G & N 9e
3. Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The
company has 10,000 machine hours of idle capacity available each year. This idle capacity unit product cost of this part is computed as follows:
could be used by the company to make, rather than buy, one of the components used in its Direct materials ................. $11.30
production process. Hadley needs 5,000 units of this component each year. At present, the Direct labor ..................... 22.70
component is being purchased from an outside supplier at $7.50 per unit. Variable production Variable manufacturing overhead .. 1.20
cost for the component would be $4.10 per unit, and additional supervisory costs would be Fixed manufacturing overhead ..... 24.70
$18,000 per year. Already existing fixed costs that would be allocated to this part amount to Unit product cost .............. $59.90
Quiz No. 4 – Relevant Costing (Problems) Page 1 of 4

CHIANG KAI SHEK COLLEGE SY 2012-2013 1st Semester MANAGEMENT ACCOUNTING PART 2

An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If administrative expense would be $1.20 less per unit on this order than on normal sales.
the company accepts this offer, the facilities now being used to make the part could be used to Direct labor is a variable cost in this company.
make more units of a product that is in high demand. The additional contribution margin on this
other product would be $264,000 per year. 9. Suppose there is ample idle capacity to produce the units required by the overseas customer
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be and the special discounted price on the special order is $76.40 per unit. By how much would
avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would this special order increase (decrease) the company's net operating income for the month? (E)
continue even if the part were purchased from the outside supplier. This fixed manufacturing A. ($17,000) C. $13,400
overhead cost would be applied to the company's remaining products. B. ($5,000) D. $48,000

6. How much of the unit product cost of $59.90 is relevant in the decision of whether to make or 10. Suppose the company is already operating at capacity when the special order is received from
buy the part? (E**) the overseas customer. What would be the opportunity cost of each unit delivered to the
A. $22.70 C. $38.00 overseas customer? (M1**)
B. $35.20 D. $59.90 A. $7.20 C. $9.70
B. $8.40 D. $32.50
7. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it? (E*) 11. Suppose there is not enough idle capacity to produce all of the units for the overseas customer
A. ($328,000) C. $264,000 and accepting the special order would require cutting back on production of 700 units for
B. ($64,000) D. $548,000 regular customers. The minimum acceptable price per unit for the special order is closest to:
(M1)
8. What is the maximum amount the company should be willing to pay an outside supplier per A. $63.78. C. $78.90.
unit for the part if the supplier commits to supplying all 40,000 units required each year? (E**) B. $69.10. D. $86.10.
A. $6.60 C. $59.90
B. $44.60 D. $66.50 12. The Clemson Company reported the following results last year for the manufacture and sale of
one of its products known as a Tam.
The next three questions are based on the following information. G & N 9e Sales (6,500 Tams at $130 each) ............... $845,000
Eley Company produces a single product. The cost of producing and selling a single unit of this Variable cost of sales ........................ 390,000
product at the company's normal activity level of 40,000 units per month is as follows: Variable distribution costs ................... 65,000
Direct materials .......................... $42.60 Fixed advertising expense ..................... 275,000
Direct labor .............................. 8.10 Salary of product line manager ................ 25,000
Variable manufacturing overhead ........... 1.10 Fixed manufacturing overhead .................. 145,000
Fixed manufacturing overhead .............. 17.30 Net loss ...................................... ($ 55,000)
Variable selling & administrative expense . 1.80 Clemson Company is trying to determine whether or not to discontinue the manufacture and
Fixed selling & administrative expense .... 8.00 sale of Tams. The operating results reported above for last year are expected to continue in
The normal selling price of the product is $86.10 per unit. the foreseeable future if the product is not dropped. The fixed manufacturing overhead
represents the costs of production facilities and equipment that the Tam product shares with
An order has been received from an overseas customer for 2,000 units to be delivered this month other products produced by Clemson. If the Tax product were dropped, there would be no
at a special discounted price. This order would have no effect on the company's normal sales and change in the fixed manufacturing costs of the company.
would not change the total amount of the company's fixed costs. The variable selling and
Quiz No. 4 – Relevant Costing (Problems) Page 2 of 4

CHIANG KAI SHEK COLLEGE SY 2012-2013 1st Semester MANAGEMENT ACCOUNTING PART 2

Assume that discontinuing the Tam product would result in a $120,000 increase in the 15. Assume that discontinuing Product J would result in a $100,000 increase in the contribution
contribution margin of other product lines. How many Tams would have to be sold next year margin of other product lines. How many units of Product J would have to be sold next year for
for the company to be as well off as if it just dropped the line and enjoyed the increase in the company to be as well off as if it just dropped Product J and enjoyed the increase in
contribution margin from other products? (M1) contribution margin from other products? (E**)
A. 5,000 units C. 6,500 units A. 2,500 units. C. 15,500 units.
B. 6,000 units D. 7,000 units G & N 9e B. 11,875 units. D. 16,125 units.

The next three questions are based on the following information. G & N 9e The next five questions are based on the following information. Michael Maher, Univ of California
Bingham Company manufactures and sells a product, Product J. Results for last year for the Hospital Supply, Inc. produced hydraulic hoists that were used by hospitals to move bedridden
manufacture and sale of Product J are as follows: patients. The costs of manufacturing and marketing hydraulic hoists at the company’s normal
volume of 3,000 units per month are shown below.
Sales--10,000 units at $160 each .................... $1,600,000 Unit manufacturing costs:
Less costs: Direct materials $550
Variable production costs ......................... 960,000 Direct labor 825
Sales commissions--15% of sales ................... 240,000 Variable overhead 420
Salaries of line supervisors ...................... 195,000 Fixed overhead 660 $2,455
Traceable fixed advertising expense ............... 180,000 Unit marketing costs:
Fixed general factory overhead (allocated to products on the basis Variable $275
of square feet occupied) .. 170,000 Fixed 770 1,045
Total costs ..................................... 1,745,000 Total unit costs $3,500
Net loss ............................................ $ (145,000)
Unless otherwise stated, assume there is no connection between the situations described in the
Bingham Company anticipates no change in the operating result for Product J in the foreseeable questions; treat each independently. Unless otherwise stated, assume a regular selling price of
future if the product is produced. Bingham is reexamining all of its products and is trying to decide $4,350 per unit. Ignore income taxes and other costs not mentioned in the cost schedule or in a
whether to discontinue the manufacture and sale of Product J. The company's total fixed factory question itself.
overhead cost would not be affected by this decision.
16. Market research estimates that monthly volume could increase to 3,500 units, which is well
13. Assume that discontinuing the manufacture and sale of Product J will not affect the sale of within hoist production capacity limitations, if the price were cut from $4,350 to $3,850 per unit.
other products. If the company discontinues Product J, the change in annual net income due to Assuming the cost behavior patterns implied by the data in the cost schedule are correct,
this decision will be a: (E**) would you recommend this action be taken? (E)
A. $25,000 decrease. C. $170,000 decrease. A. No, because the profit will decrease by $610,000.
B. $145,000 increase. D. $315,000 decrease. B. Yes, because the profit will increase by $200,000.
C. Yes, because the profit will increase by $1,500,000.
14. Assume that discontinuing Product J would result in a $30,000 increase in the contribution D. No, because the profit will decrease by $2,400,000.
margin of other product lines. If Bingham chooses to discontinue Product J, then the change in
net income next year due to this action will be a: (E) 17. On March 1, a contract offer is made to Hospital Supply, Inc. by the federal government to
A. $145,000 decrease. C. $120,000 increase. supply 500 units to Veterans Administration Hospitals for delivery by March 31. Because of an
B. $5,000 increase. D. $145,000 increase. unusually large number of rush orders from their regular customers, Hospital Supply plans to
Quiz No. 4 – Relevant Costing (Problems) Page 3 of 4

CHIANG KAI SHEK COLLEGE SY 2012-2013 1st Semester MANAGEMENT ACCOUNTING PART 2

produce 4,000 units during March, which will use all available capacity. If the government Should the proposal be accepted for a price (i.e., payment to the contractor of $2,475 per unit?
order is accepted, 500 units normally sold to regular customers would be lost to a competitor. (M1**)
The contract given by the hospital would reimburse the government’s share of March A. No, because income would decrease by $31,000.
production costs, plus pay a fixed fee (profit) of $275,000. (There would be no variable B. Yes, because income would increase by $525,000
marketing costs incurred on the government’s units.) What impact would accepting the C. Yes, because income would increase by $1,285,000
government contract have on March income? (E**) D. Yes, because income would increase by $1,765,000
A. $(1,350,000) C. $(617,500)
B. $(850,000). D. $ 500,000
Answer Key
18. Hospital Supply has an opportunity to enter a foreign market in which price competition is
keen. An attraction of the foreign market is that demand there is greatest when demand in the 1. D 6. C 11. A 16. A
domestic market is quite low; thus idle production facilities could be used without affecting
domestic business. An order for 1,000 units is being sought at a below-normal price in order 2. C 7. B 12. D 17. C
to enter this market. Shipping costs for this order will amount to $410 per unit, while total costs
3. A 8. B 13. A 18. A
of obtaining the contract (marketing costs) will be $22,000. No other variable marketing costs
would be required on this order. Domestic business would be unaffected by this order. What 4. B 9. D 14. B 19. A
is the minimum unit price should Hospital Supply should consider for this order of 1,000 units?
(E) 5. A 10. D 15. B 20. A
A. $2,227 C. $3,750
B. $3,000 D. $4,290

19. A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoist
units per month directly to Hospital Supply’s customers as orders are received from Hospital
Supply’s sales force. Hospital Supply’s fixed marketing costs would be unaffected, but its
variable marketing costs would be cut by 20% (to $220 per unit) for these 1,000 units
produced by the contractor. Hospital Supply’s plant would operate at two-thirds of its normal
level, and total fixed manufacturing costs would be cut by 30% (to $1,386,000). What in-house
unit cost should be used to compare with the quotation received from the supplier? (M1**)
A. $2,444 C. $3,760
B. $3,000 D. $4,240

20. A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoist
units per month directly to Hospital Supply’s customers as orders are received from Hospital
Supply’s sales force. Hospital Supply’s fixed marketing costs would be unaffected, but its
variable marketing costs would be cut by 20% (to $220 per unit) for these 1,000 units
produced by the contractor. Hospital Supply’s plant would operate at two-thirds of its normal
level, and total fixed manufacturing costs would be cut by 30% (to $1,386,000).

Quiz No. 4 – Relevant Costing (Problems) Page 4 of 4